Christmas Rally Part 2 Could Be Very Nice

SUMMARY:
- More of the same, but that means a continued melt higher for stocks.
- Financials lead again and SP500 climbs. If industrials, energy, and commodities resume their moves, the Christmas rally part 2 could be very nice.
- China starts a new round of news, announcing another bank reserve increase.
- Michigan Sentiment tops expectations: at this stage of a recovery sentiment actually means what it says.
- Some very nice tests are setting up new buys and new rallies toward year end.

No volume but stocks rally off a choppy morning to close with decent gains at session highs.

Friday was an interesting day, although it did not seem that interesting when watching the market. Very similar to the action Wednesday and Thursday with non-spectacular moves to the upside, but moves to the upside nonetheless. There was indecision early on. Futures were up, but they came off approaching the open. The market did manage to open up, but sold after the bell into the first hour. Looking at the SPY, stocks filled the gap completely. Looking at the intraday chart after that opening fade, you can see two reaches lower that filled the gap from the Thursday close, but that bounced right back up in the same bar. Buyers were ready to move in. It did not hurt that the Michigan Sentiment came out much better than expected at 74.2 versus the 72.5 anticipated. That topped the prior month of 71.6, posting the best reading since June. Consumers do indeed feel better. You can see it in retail sales and in the consumer sentiment indices. Consumers are coming out of a two-year period of frustration at with the economic dysfunction. They have a little more money in their pocket as the stock market has been up, so they feel a little better. With this kind of deep recession this is the one time where sentiment readings actually reflect the real actions of the consumer.

The market bumped up ahead of that news it comes out early for subscribers but it never really took off. It was a slow melt to the upside once again. By the way, note the inverted head and shoulders through mid-morning. As I often say, mid-morning is the fulcrum for the rest of the day, and the market trended higher into the close. All the indices drifted higher, not just the SP500. It did allow the SP500 to put some more real estate between it and the prior November peak at 1227. The SP500 closed at 1240, so it has 13 points. That is not an insurmountable lead that will prevent it from ever selling off to that level or breaking it, but it is getting a little more comfortable. Volume was down, so it was no biggie in terms of the strength of the move, but the bias continues to be upside. After this pause at the prior peak, it looks like the SP500 wants to drift higher, and perhaps pick up some steam to rally into the Christmas season as we look for part two of the Christmas rally (or, as the politically correct would say, the "holiday rally").

SP500 put some real estate on the November peak, but was behind the times as far as the growth indices. They were in the lead again. NASDAQ, +0.8%; SP500, +0.6%; Dow, +0.35%; SP600, +1.2%; SOX, flat; NASDAQ 100, +0.6%. It is the smaller issues that are doing better, and that is good for the economy. The market shows the smaller stocks performing better, and they need the stronger domestic economy to earn those higher stock prices. It looks better for the US economy, at least the way the market is moving now.

There was other important news out in the morning. The trade balance was a lot better than expected. It was only down 38B versus the 44B expected. I can live with that. Import and export prices were up. Taking out oil, they still rose 0.8% in December. Adding in oil, it was 1%. We are importing a little inflation, no doubt. Michigan Sentiment came in just fine. The treasury budget was down considerably. The deficit grew much more than expected, but that is no surprise as government spending remains very high.

There was other important news that impacted the market and could impact the early trade next week. China increased the reserves on its banks for the third time in five weeks. I think it is a half dozen times over the past six months. Its CPI is out on our Saturday. Will that warrant China raising interest rates? It is one thing to raise reserve requirements of the banks; it is another thing to raise interest rates. They have not done it yet, and a lot of people are concerned that it will happen.

PIMCO raised its forecast for 2011 to 3.5 GDP growth from 3%. That was based upon the tax-cut compromise. If it gets passed, we should have a better economy. There is a little extra goose there from payroll taxes and that sort of thing. It is interesting that there is a 53B kicker in there on the extension of the unemployment benefits. While that does give people some much-needed funds, you have to remember that the employers are paying for that. If they are paying for people who are not at work, will they have much incentive to initiate new jobs? I know that sounds harsh, but it is true. It is very much a cost to these companies and it is factored into the bottom line. They have to do it.

We bought some NFLX yesterday, and then it moved onto the SP500 and enjoyed a nice day as a result. Remember I had talked about a pause. Energy stocks and industrials were taking a pause while the financials continue to move higher. If the SP500 could get these on track, it could make a strong upside move. Even with these important sectors resting that help lead it higher, it is moving to the upside. That is important. When these good-looking patterns start moving up, then the SP500 might get some real momentum behind this move.


OTHER MARKETS

Dollar. The dollar did not go anywhere on the session (1.3224 Euro versus 1.3268), putting in just a modest gain. It is testing after a big move, a pullback, and now it is trying to get on track again. It wants to see what will happen in China, and that held it back a little to end the week.

http://investmenthouse.com/ihmedia/dxy0.jpeg


Bonds. Bonds sold again (10 year US treasury 3.33% versus 3.21% Thursday). Bonds are still a slaughterhouse right now.

http://investmenthouse.com/ihmedia/tlt.jpeg


Gold. Gold did not have as great a day. It bounced nicely on Thursday, and it lost some ground on Friday ($1,384.90, -$7.90). It sold off intraday and rebounded. It is trying to find support at this level of the October interim peak. An important level coming up for gold. If it reacts well next week, it will take off to the upside. After China, if it does not react well, it will sell back down maybe to 1325.

http://investmenthouse.com/ihmedia/xgld.jpeg


Oil. Oil had been on a tear, and it is softening a bit ($87.89, -0.58). It is sitting right on top of a prior peak, and it looks beautiful for a new break to the upside.

http://investmenthouse.com/ihmedia/xoil.jpeg


TECHNICAL SUMMARY

INTERNALS

Volume. Volume was considerably lower, falling almost 9% on the NASDAQ to 1.7B and down 3.5% on the NYSE to 975M. That was below average, so it was not a big day. Stocks just drifted higher, and there were no sellers. There were not a lot of buyers, and without the sellers, the stocks drifted to the upside.

Breadth. Breadth was not bad at 2:1 on the NASDAQ, but it was a mediocre 1.8:1 on the NYSE.


CHARTS

SP500. SP500 broke above its April peaks and is now taking out its November peak, joining the other indices. It is moving higher. It has some distance on that about 13 points. Not totally a comfortable level, but it is feeling the upside. If it gets the industrials and energy stocks back in the fold, it could make a nice move. It has broken through the old highs, and now it is looking at the 127% Fibonacci extension. It has room to run, and there is no real resistance overhead right now.

NASDAQ. NASDAQ has broken through its two prior peaks and is moving up well. Volume is not huge, but it is putting more distance on that November peak. It rallied, paused, and now upside again. Will it continue indefinitely? I do not think so. It might get some trouble right before Christmas and the New Year, but for now we are letting our positions run because it continues to move higher. The path of least resistance right now is money chasing performance toward the end of the year.

SP600. After a lateral move of three days, a big 1.2% move to the upside. No volume overall in the NYSE, but there is plenty of buying in the smaller-cap names. That is a good harbinger for the rest of the economy, thus the stock market forecasts a better and improving economy. It can just keep on moving if the economy keeps on improving. Obviously, investors are viewing the tax compromise very favorably.

SOX. SOX did not go anywhere on the session. It was basically flat, but it has had an incredible run over the past several months. I do not think anyone will get their feelings hurt if it takes a day or two off.


LEADERSHIP

Financial. Financials were leaders yet again on Friday. JPM moved to the top of its range. It was looking nice, breaking through the 200 day EMA. There is serious leadership out of the financials. WFC gapped to the upside, continuing its move. It was not as powerful but still looking quite good. GS moved up and challenged its prior peak. Remember it formed this ABCD pattern, and it is rallying back toward that prior high. Financials are making their moves.

Industrial. Industrials had been moving well they helped lead. They are not there yet, but they are making nice pullbacks. CAT had a nice three-day pullback. 1-2-3 as the 10 day EMA rises up below it. CMI shows the same type of thing. A little 1-2-3 pullback towards the 10 day EMA. That often leads to a new move higher. DE could not wait. It had a twelve-day pullback, and now it surged higher on rising volume on Friday. Very nice moves from this leading industrial, but the others will have to catch up.

Energy. Energy is the same issue. A very nice lateral move by HAL. Nice pullback. BTU got a little rocky, but it has checked up, moved laterally, and it looks like it is ready to make another move to the upside as well. We are getting some help from these key groups.

Metals. FCX announced a stock split this week, and it moved up a little bit. It is trying to move up off its test and help out the market overall. XME moved higher off its 10 day EMA test on Friday, starting back up. We picked up positions in that as well.

Technology. I said it was the smaller issues that were performing better. AAPL was up on the day, but just 0.25%. It is still struggling at the top of its range. JNPR broke out of its triangle on Thursday. It did not add much on Friday, but it tested just as I wanted it to. We picked up some positions and it started to recover. FFIV gapped up because it was being added to the SP500, so there is good reason for it to move. RAX had a big surge. There is talk of a possible buyout. We used to surge to take some of the December options off the table for some good gains. Stocks have been moving well, and after this little pullback, they continue to set up and rally again. The large caps are struggling a bit while the smaller issues are setting up and looking like they are getting ready to move once more.

Retail. Retail was lagging a bit. It tested as well, which is perfectly fine because it rallied well. DECK made a new bounce off the 10 day EMA on Friday. A very powerful stock. LULU continued higher with an 8% move after its great earnings the other day. Restaurants have been performing well. EAT has had a really nice test of this break higher. That could give an interesting entry point for a new run to the upside.

Miscellaneous leaders. TIBX had a nice lateral move as the 10 day EMA rises up to it after a nice stair step higher. Looking really good. PVH had a nice lateral move after a breakout. There is a lot of this. SLAB had a nice break higher and now has a little pennant or flag, moving laterally. There are many stocks that have moved well, made a small test, and are still in position to move again. This is where we get that second push higher of the second half of the Christmas rally. As these stocks break higher, they would be great stocks to ride further to the upside. We may not stay in them for very long, but if we get out another two weeks towards Christmas, that would be outstanding. Many stocks are in similar positions whether large caps on the NYSE and the SP500 or the smaller issues that are on NASDAQ and the NYSE. There are plenty of leaders still out there, poised to move higher. I do not know what will happen after the first of the year, but it sure looks like we can get more upside out of them right now.


THE MARKET

MARKET SENTIMENT

VIX. Volatility broke below the recent lows, but in March and April it was down much lower. Of course, that was before the market sold off and it rallied higher. Remember that volatility has to set up a correlation, and it is not really doing that right now. Also, volatility can fall down considerably as the market rallies without necessarily being an indication that the market is going to sell off. It has to have that correlation develop, and it tried to develop in October to November. There was a loose correlation there, but it does not look like that is the case right now. The market is drifting higher and volatility is drifting lower. People would say the market is apathetic, and that sets it up for some selling. That could be, but it just rallied, paused and tested, and then rallied again. This was after a very good pullback from late November through early December. It set itself up well, and now it is moving. I am not going to get to upset about volatility right now.

VIX: 17.61; +0.36
VXN: 18.77; -0.29
VXO: 16.52; +0.36

Put/Call Ratio (CBOE): 0.76; +0.05


Bulls versus Bears:

This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market, then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market does not have the cash to drive it higher.

Bulls: 56.2% versus 55.4%. After a small dip the prior 2 weeks (from 55.7% and 56.2%), advisors returned to their bullishness, matching the peak on this move. Strong surge from 48.4% just a month back, the strongest move upside since May, indeed topping that level and getting closer to the 5 year high at 62.0. Moving toward the level considered bearish, i.e. where so many are in the market and believe it is going up that the ammunition to send it higher runs low. This is where you start to be careful and watch for breakdowns, but there is also a lot of liquidity being pushed into the market and that can continue the move despite excess bullishness. The crossover level at 29% bulls is long gone, but it did its job. The high on the last leg was 56.0% after starting at 35.6% on the low in February, the lowest it has been since July 2009 . . . until this last leg. 35% is the threshold level suggesting bullishness. Again, to be seriously bearish it needs to get up to the 60% to 65% level.

Bears: 21.3% versus 21.8%. After bumping modestly higher the prior week (from 21.6%), the bears were in decline again. Down from 28.3% in September. The 37.7% peak at the height of the crossover is well in the rearview mirror but bears remain well below the 35% level, above which is considered bullish for the market overall. Hit 18.7% on the low in April. Hit a high of 27.8% level on the prior leg in February. For reference, cracking above the 35% threshold considered bullish. Hit a high on the prior run at 47.2%. For more reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.


NASDAQ

Stats: +20.87 points (+0.8%) to close at 2637.54
Volume: 1.691B (-8.73%)

Up Volume: 1.295B (+85.149M)
Down Volume: 349.502M (-323.78M)

A/D and Hi/Lo: Advancers led 2.17 to 1
Previous Session: Advancers led 1.44 to 1

New Highs: 0 (-186)
New Lows: 0 (-21)

NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg

NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg

SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg


SP500/NYSE

Stats: +7.4 points (+0.6%) to close at 1240.4
NYSE Volume: 974.691M (-3.46%)

Up Volume: 746.375M (+39.646M)
Down Volume: 220.674M (-61.637M)

A/D and Hi/Lo: Advancers led 1.84 to 1
Previous Session: Advancers led 1.28 to 1

New Highs: 407 (+112). Continued strength here as the small caps lead the way higher.
New Lows: 93 (+44)

SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg

SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg


DJ30

Stats: +40.26 points (+0.35%) to close at 11410.32
Volume DJ30: 152M shares Friday versus 168M Thursday.

DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg


MONDAY

There is a boat load of data coming out next week, starting on Tuesday with retail sales and the PPI. A Fed rate decision will be out. People will be curious about what the statement says, but I do not expect it will be too different. Bernanke has been out in support of Quantitative Easing. With this tax compromise, he may feel better about getting some fiscal help. Wednesday is the New York PMI, industrial production and capacity, and the CPI. We will see if inflation is kicking up or not. I do not know if you can trust the government on that. Initial claims are on Thursday along with housing starts and the Philly Fed. Leading economic indicators are out on Friday.

The big news will likely be on Monday when there is nothing scheduled because China will make some kind of decision this weekend. The scuttlebutt is that China will say it needs to raise interest rates because it is having too much threat of inflation. That has people worried that it could dampen the new move higher, particularly since the drift up this week was on low volume overall. China tends to release news in threes. The first two stories are typically downers, and then the third one is a more positive spin. That is the way they do things. We may have something to deal with in terms of an interest-rate hike next week. I am watching how gold will react to that. It is in a critical point. Gold has recovered nicely, and it is testing. It is right at its trendline, and it looks like it is trying to find buyers here. It will impact a lot of other currencies and stocks as well.

If China raises its interest rates, it makes its currency a little more valuable, although it does not let it float. That is okay because it will still have the impact. Everyone will know things are solid there, and it will impact the US currency. It may make it decline a bit. If the US currency declines somewhat, stock prices may continue higher. That is not what you are hearing from a lot of people. They say if China raises rates we could suffer. The idea is that if it raises rates and slows down its economy, the US will suffer because we cannot sell as much to them. Then the cycle goes on. I am looking at it from a different angle. That might be the first reaction. After that, the reaction might be good for US stocks long term if the dollar goes down a bit. Then the rally will continue.

After all, we are looking for a continuation of the rally, not necessarily a new powerful rally continuing. Some are saying that is the case, and maybe they are right. There is certainly nothing overly negative impacting the market right now. There is a lot of liquidity coming in, there is some year-end chasing of performance happening, and there is plenty of leadership. With that combination, I am not going to sit it out. I will look at the stocks I have talked about that have rallied well and have made a good pullback. They can provide us a nice vehicle to rally higher as the Christmas/winter holiday rally continues.

The news is important. We have to look at it because it does impact the market near term, and the market always overreacts in the near term whether it is good or bad. There could be a negative reaction, but if so, I do not think it will be a complete rollover. It is possible. If it is, after the indices have broken to a new high and they roll over and crash back town, that could be a problem. If it is just a test or maybe even a positive reaction, I think we will be okay. A test gives us even better buy points on these stocks that have pulled back. If it continues higher, those stocks will start breaking to the upside and we can step in and catch them as a continued part of our rally to the upside.

We have taken some profits this week on some stocks with December options that were running out of time. We had some pretty huge gains (300-400%+), so I took them off. You take some off along the way with partials, and then you let them run until you cannot let them run anymore, or until the market takes you out. We have a lot of big gains for January options as well, but we will let them run. I am mostly letting positions run because SP500 was the lagging index, but it, too, broke above the November peaks and is moving higher. With the laggard finally making its move through the November peak, I am not going to cut the move off. Indeed, I will look to find new ways to play the next leg to the upside. As noted, there are several of those.

We will be ready with some new plays maybe a lot of new plays from the looks of it on stocks that we already own positions in. No problem with that; they are working well. They are setting up new moves just like DECK did back in November with a flag pattern after it broke out of the triangle. I will look for the same thing with these other stocks as they test moves after solid moves to the upside (such as CAT). With that in mind, and with the mindset that we will take advantage of a last push toward the holiday, we will find good plays for you.

I will see you on Monday, ready to put those plays into action. Have a wonderful weekend and enjoy your Christmas shopping.


Support and Resistance

NASDAQ: Closed at 2637.54

Resistance:
2725 from July 2007 interim peak
2735 from late 2007 interim peak
2862 is the 2007 peak

Support:
2593 is the November 2010 high
2569 is the November gap up point through the April 2010 peak
The 18 day EMA at 2567
2550 from May and June 2008 peaks
2540 is the gap up point from early November
2535.28 is the April 2010 intraday peak
2530 is the April 2010 closing peak
2518 is interim peak from April 2010
2511 is the lower range of the November gap up point
The 50 day EMA at 2499
2482 is the recent October peak
2460 is the November 2010 low.
2434 is the May interim peak and the 78% Fibonacci retracement of the April selloff.
2425 is an interim peak from May 2010
2382-2395 from 2008
2324-2370 is a range of resistance from early 2008
The 200 day SMA at 2351
2341 is the June 2010 peak
2320 to 2326.28 is the January 2010 high
2319 from the September 2008 peak
2310 is the August 2010 peak


S&P 500: Closed at 1240.40
Resistance:
1313 from the August 2008 interim peak

Support:
1227 is the November 2010 peak
1220 is the April 2010 peak
The 18 day EMA at 1212
The 50 day EMA at 1189
1185 from late September 2008
1174 is the May 2010 high, 78% Fibonacci retracement of April peak
1173 is the November 2010 low
1170 is the prior March 2010 high
1156 is the Sept 2008 low
1151 is the January 2010 peak
The 200 day SM A at 1138
1133 from a September 2008 intraday low
Bottom of the January 2010 consolidation 1131 to 1136
1129 to 1131 is the June and August 2010 peaks
1119 is the early December intraday high
1114 is the November 2009 peak
1106 is the September 2008 low
1101 is the October 2009 high and the recent May and June 2010 interim peaks
1084 to 1080 (September 2009 peak)
1078 is the October range low
1070 is the late September 2009 peak as well as several other peaks and valleys even in 2010.
1065 is the May flash crash intraday low.
1044 is the October 2008 intraday high AND the February 2010 low
1039 to 1040 are the May, June, and August 2010 lows


Dow: Closed at 11,410.32
Resistance:
11,452 is the November 2010 peak
11,734 from 11-98 peak

Support:
The 18 day EMA at 11,271
11,258 is the April 2010 peak
11,205 is the April closing high
The 50 day EMA at 11,115
11,100 from the 7-08 low
10,963 is the July 2008 low
10,920 is the recent May high
10,730 is the January 2010 peak
The 200 day SMA at 10,670
10,609 from the Mid-September 2008 interim low
10,594 is the June 2010 peak
10,496 is the November 2009 high
10,365 is the late September 2008 low
10,285 is the late December consolidation peak
10,260 from the May and June 2010 interim peaks are breaking
10,209 is recent August 2010 low
10,120 is the October 2009 peak
9938 is the August 2010 low
9918 is the September 2008 peak
9855 is the early September peak in its lateral range
9835 is the late September 2009 peak AND the February 2010 low
9829 is the September 2008 closing high
9774 is the May 2010 intraday low


Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.

December 10 - Friday
Trade Balance, October (08:30): -$38.7B actual versus -$44.5B expected, -$44.6B prior (revised from -$44.0B)
Export Prices ex-ag., November (08:30): 0.8% actual versus 0.6% prior (revised from 0.7%)
Import Prices ex-oil, November (08:30): 0.8% actual versus 0.3% prior
Michigan Sentiment, December (09:55): 74.2 actual versus 72.5 expected, 71.6 prior
Treasury Budget, November (14:00): -$150.4B actual versus -$134.0B expected, -$120.3B prior

December 14 - Tuesday
PPI, November (08:30): 0.5% expected, 0.4% prior
Core PPI, November (08:30): 0.2% expected, -0.6% prior
Retail Sales, November (08:30): 0.5% expected, 1.2% prior
Retail Sales ex-auto, November (08:30): 0.6% expected, 0.4% prior
Business Inventories, October (10:00): 1.1% expected, 0.9% prior
FOMC Rate Decision, December 14 (15:15): 0.25% expected, 0.25% prior

December 15 - Wednesday
MBA Mortgage Applications, 12/10 (07:00): -0.9% prior
CPI, November (08:30): 0.2% expected, 0.2% prior
Core CPI, November (08:30): 0.1% expected, 0.0% prior
Empire Manufacturing, December (08:30): 3.0 expected, -11.14 prior
Net Long-Term TIC Fl, October (09:00): $81.0B prior
Industrial Production, November (09:15): 0.3% expected, 0.0% prior
Capacity Utilization, November (09:15): 75.0% expected, 74.8% prior
NAHB Housing Market , December (10:00): 17 expected, 16 prior
Crude Inventories, 12/11 (10:30): -3.82M prior

December 16 - Thursday
Initial Claims, 12/11 (08:30): 425K expected, 421K prior
Continuing Claims, 12/05 (08:30): 4078K expected, 4086K prior
Housing Starts, November (08:30): 545K expected, 519K prior
Building Permits, November (08:30): 558K expected, 550K prior
Current Account Balance, Q3 (08:30): -$125.3B expected, -$123.3B prior
Philadelphia Fed, December (10:00): 12.5 expected, 22.5 prior

December 17 - Friday
Leading Indicators, November (10:00): 1.2% expected, 0.5% prior

By: Jon Johnson, Editor
Copyright 2010 | All Rights Reserved

Jon Johnson is the Editor of The Daily at InvestmentHouse.com

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